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BusinessWeek: April 10, 2000 |
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BusinessWeek Investor: Estate Planning
With a Couple of Million, You Could Do a Lot of Good How to set up a family foundation
Hers is one of about 29,000 family foundations in the U.S., according to Washington, D.C.-based Council on Foundations. With a booming bull market on Wall Street minting more and more millionaires, the number of family foundations is rising sharply. Between 1995 and 1997 alone, the latest period for which data are available, some 4,000 family foundations were born. All told, family foundations now have more than $100 billion in assets and distribute about $6 billion in grants a year, says the council. Many family foundations have less than $5 million in assets, but a huge one stands out: the Bill & Melinda Gates Foundation, which combines all the foundations set up by Microsoft's chairman and his wife since 1995, with $21.8 billion in assets. Its missions include furthering education and financing inoculation of children against disease. If your own stake in Microsoft or another stroke of good fortune has enriched you beyond your immediate needs, creating your own foundation could be an effective way to give some of your wealth back to society. Indeed, a foundation can help organize your philanthropy while allowing you or your family to remain in control of investments and donations. Foundations are also a fine vehicle for passing down values to a new generation. But first, you need to determine your foundation's philosophy. "I only recommend a foundation if I hear that the client has a sustained vision of charitable giving," says Karen Green, a staff member at the Council on Foundations. Once you fix a goal, seek advice from a lawyer or philanthropic consultant. A foundation association (table) can refer you to experienced pros. Also, consider whether you are funding the foundation adequately. Many people start with less than $1 million, but Tracy Gary, a philanthropic consultant and co-author of Inspired Philanthropy: Creating a Giving Plan (Chardon Press, $20), advises starting with $2 million. Otherwise, given the costs of running a foundation, there are more efficient ways to be philanthropic. And whatever you do, "don't create a foundation for tax purposes," advises Beth Rodriguez, a wealth specialist at J.P. Morgan Investment Management in Chicago. In fact, tax benefits for donations to private foundations are less generous than for donations to other charities. For example, donors to a private foundation are limited to a deduction--which can be carried forward for five years--of up to 30% of their adjusted gross income. On gifts to a public charity, the limit rises to 50%. For appreciated stock, the limit is 20% for private and 30% for public charities. "The IRS basically says the less control you have over the money, the greater the tax break," says Green. How you endow the foundation is subject to strict Internal Revenue Service rules. Gifts of cash, stock, and even rare books are fine, but real estate and stock options are O.K. only under certain conditions. A foundation's expenses will vary, depending on how much outside consulting is required. You may, for example, wish to outsource daily management of the foundation. But in general, the Council on Foundations says you should budget about $10,000 for the startup. Annual maintenance fees, including those for money management, should run about 2% to 3% of the endowment. But this will depend on how much help has to be hired. Just preparing the yearly federal 990-PF tax form, for example, costs about $2,000. Because foundations are governed by both state and federal governments, some states may require a copy of the IRS form along with a brief annual report. And your foundation may have special needs. If its goal is to fund human genetic research, for example, you may need to put an expert on the payroll to evaluate applicants' work. Most foundations are structured like corporations and require at least three board members. A trust is the less commonly used governance option. It can be very restrictive--which may exactly suit a particular foundation--and it may have as few as one trustee. Either structure allows for a "sunset clause," which dissolves the foundation at a certain trigger point: when the last grandchild dies, say, or scientists cure cancer. You or other family members can work for the foundation and draw salaries. But other financial interactions with the foundation are subject to strict federal rules on "self-dealing." For example, the foundation can't rent space in a building you own, even if you charge a below-market rate. And be sure to craft your foundation's bylaws to avoid destructive conflicts with relatives. "What happens when a board member gets divorced from the family member?" asks Green. "Can they still serve on the board?" Federal law requires that a foundation give away at least 5% of its assets' market value every year or face a 15% excise tax on the portion of the 5% that wasn't disbursed. Net investment income, including realized gains, also is subject to an excise tax of as much as 2%. A good source on fine points of legal and tax issues is Family Foundations and the Law, by John Edie (Council on Foundations, $55). Once the investment and administrative pieces are in place, the fun part starts--giving away money. But you'll need some philanthropic acumen. "Many people want to do good, but they don't know how to make it work," says Christopher Mogil, whose Eugene (Ore.) organization, More Than Money, helps people give money effectively. Nathanael Berry, 37, used a questionnaire for relatives to develop a giving mission for the Sandy River Charitable Foundation, set up by his grandfather, A.W. Berry, in North Baldwin, N.Y. Berry says common threads in the responses allowed them to write a succinct mission statement: to "engender the physical and social well-being and encourage the human spirit of our neighbors throughout the world." The trust has given away $4 million in its two-year lifetime, helping to dig wells in Senegal and clear land mines in Cambodia. Once your foundation has a mission statement, it needs a mechanism for finding worthy recipients. What will the grantmaking process be like? Who will evaluate proposals? Developing relationships with the grantees can be one of the real joys of running a foundation, says Mogil, but many people don't know how to do this. Still, more are learning. Foundations increasingly are being created during the givers' lifetime--not as a legacy after death, but as an instant cure for affluenza. "Anybody can give away more than they do now, and everybody should," says Ruth Ann Leach Harnisch. "A great day for me is telling someone `Yes' and writing a check." Return to top | |
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 TABLE Foundation Q&A What is the foundation's mission? The more specific the mission, the more successful the impact How big is the endowment? Size determines the right charitable vehicle Who will be involved? Decide on board members and the amount of time you have to give Who will run the foundation? Family members, a staff, or a consulting firm are options Have you determined the investment policy? Select a fund manager and choose a style you can live with Is the governance structure carefully crafted? Bylaws should anticipate future succession issues What about grants? Recipients have to be found and evaluated Do you know the law? Know the rules to keep the foundation in good stead with the IRS Return to top TABLE Help for Budding Philanthropists Small Foundations Association 202 393-4433 www.smallfoundations.org Council on Foundations 202 466-6512 www.cof.org Forum of Regional Associations of Grantmakers 202 467-0383 www.rag.org The Foundation Center 212 620-4230 www.fdncenter.org More than Money 800 255-4903 www.morethanmoney.org National Center for Family Philanthropy 202 293-3424 www.ncfp.org Philanthropy Roundtable 202 822-8333 www.philanthropyroundtable.org Return to top |
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